What financial statements does a small business need?

The three statements every business should have

A balance sheet shows what a business owns and owes at a single point in time. An income statement shows revenue and expenses over a period, arriving at net profit or loss. A cash flow statement shows how cash actually moved through operating, investing, and financing activities during that same period, which can look very different from the income statement in a business with significant receivables, inventory, or debt.

A business can be profitable on the income statement and still be short on cash, because profit includes sales that have not been collected yet and expenses like capital cost allowance that never involved a cash payment at all. The cash flow statement is what reconciles the two, showing where the difference actually went, into receivables, inventory, loan repayments, or equipment purchases.

Each statement also has a natural reader. A lender evaluating a loan application usually starts with the balance sheet, to see what the business already owns and owes. An owner tracking performance month to month usually lives in the income statement. An owner worried about running out of money mid-quarter needs the cash flow statement, since it is the only one of the three built specifically to answer that question.

Together, these three answer three different questions: what the business is worth on paper, whether it made money, and whether it generated or burned cash. Our answer on cash versus accrual accounting explains why the income statement and a bank balance can diverge.

Compilation, review or audit: who actually needs which

A compilation engagement report, the standard now known under CSRS 4200 and still commonly called a notice to reader, involves no assurance from the accountant; it simply presents management's numbers in a standard financial statement format. A review engagement involves more procedures and gives limited assurance that nothing appears materially wrong. A full audit gives reasonable assurance through extensive testing and is the most expensive and time-consuming of the three.

Most owner-operated small businesses only ever need a compilation. Banks financing a modest business loan often accept one; larger credit facilities, outside investors, or specific grant and franchise requirements are the situations most likely to require a review or an audit instead. The level required is usually spelled out in the loan agreement, the investor's term sheet, or the program's application guide, so it is worth confirming before assuming the cheapest option will be accepted.

Upgrading from a compilation to a review, or a review to an audit, is not something a business can do overnight partway through a fiscal year; each level involves procedures the accountant needs time to plan and carry out properly. Confirming the requirement early, ideally before the year even closes, avoids a scramble to redo work under a tighter standard right when a bank or investor is waiting on the statements.

Why the CRA does not require any of these, but still wants the numbers

Filing a standard corporate tax return does not require an audited or even a reviewed set of financial statements; a compilation is generally sufficient, and in many small corporations, internally prepared statements are enough. What the CRA does require is the underlying financial data, reported through GIFI codes on the T2, which map income statement and balance sheet figures to a standardized set of categories regardless of which level of statement was prepared. A corporation with straightforward operations can move directly from its internal statements to the GIFI schedule without needing anyone to sign off on the numbers first.

This surprises some new business owners who assume a T2 filing automatically requires a formal, accountant-prepared statement. It does not, though a corporation that later needs financing, sells to another business, or brings in an investor will usually find that a compilation was worth having on file well before the request for one actually arrives.

What a useful monthly management package adds

Year-end statements answer questions after the fact; a monthly management report is built to answer them while there is still time to act. A useful monthly package usually adds a comparison to budget or to the prior year, a handful of KPIs specific to the business, and commentary on anything that moved more than expected, none of which a year-end compilation is designed to provide.

A monthly package built well also flags what does not need attention, not only what does. An owner scanning the same three or four numbers every month, most of them unremarkable, is far more likely to notice the one month something actually shifts than an owner who only opens the reports once a year and has no baseline to compare against.

The three core statements still sit underneath a monthly package; the difference is timing and context. A balance sheet delivered eleven months after the fact tells an owner what already happened; the same statement produced every month, next to last month's and last year's, tells an owner whether the business is moving in the right direction while there is still a chance to change course.

How we scope this for clients

As part of our advisory work, we build the monthly reporting package first, since that is what actually helps an owner make decisions during the year, and we bring in the appropriate level of year-end statement, compilation, review, or audit, only once we know what a bank, investor, or program actually requires. Most of our clients never need more than a compilation, and we would rather confirm that early than have a client pay for a review it turns out nobody asked for.